Introduction to Financial Accounting PDF

MAHE BANGALORE INTRODUCTION TO FINANCIAL ACCOUNTING The accounting system of a business records and summarizes the financial performance/position of a business over/at a certain period of time. T...

MAHE BANGALORE INTRODUCTION TO FINANCIAL ACCOUNTING The accounting system of a business records and summarizes the financial performance/position of a business over/at a certain period of time. This information is crucial to various stakeholders of the business, who will analyze that information to make significant economic decisions. It is of vital importance that these stakeholders have good quality information to be able to make good quality decisions. FINANCIAL ACCOUNTING Financial Accounting deals with preparation of Financial Statements for external users. Financial accounts are prepared using accepted accounting conventions and standards. International Accounting Standards (IAS® Standards) and International Financial Reporting Standards (IFRS® Standards) help to reduce the differences in the way that companies draw up their financial statements in different countries. MANAGEMENT ACCOUNTING Management accounting is an integral part of management activity concerned with identifying, presenting and interpreting information used. Management accounts present information in any way which may be useful to management, for example unit-wise or product-wise. USERS OF FINANCIAL STATEMENTS We can divide the users into 2 types : External and Internal ❖ Internal users – are owners, managers, employees and other parties who are directly connected with the business. ❖ External users – are potential investors, banks, government agencies and other parties who are outside the business and need financial information about the business for a number of varied reasons. F.A. 1 C.A. Prabodh Nayak [C.A., M.B.A.,C.F.A., P.G.D.T.F.M., C.M.A. (US), C.P.A.] MAHE BANGALORE Internal Users : USERS INFORMATION NEEDS Owners (investors) Providers of capital are concerned with the risk and return of their investment. They need information so that they can take a decision to buy, hold or sell shares They need information to assess the entity’s ability to pay interest or dividends Management To plan, make decisions, and control operational activities. To review the performance of the business Segmental information for analytical purpose Employees & their Representatives To understand the profitability of the entity Ability to pay remuneration, retirement benefits and employment opportunities For bargaining for bonus payments External Users : USERS INFORMATION NEEDS Prospective Investors Risks and returns of making an investment may be assessed on the basis of published information. Financial Institutions To decide whether to extend loan facilities To determine whether repayments i.e. principal and interest, will be made on due date. Suppliers To determine whether amounts owed will be paid when due To determine what prior claims the providers of finance has on the entity Government and Govt. Agencies Allocation of resource and Determine tax policies and regulate activities of the entity General Public To measure the contribution of an entity to the economy Trends and recent developments in prosperity and range of activities. FORMS OF BUSINESS ENTITIES Sole Trader ❖ This is the simplest form of business where a business is owned and operated by one individual. With this form of entity there is no legal distinction between the owner and the business. F.A. 2 C.A. Prabodh Nayak [C.A., M.B.A.,C.F.A., P.G.D.T.F.M., C.M.A. (US), C.P.A.] MAHE BANGALORE ❖ Sole trader is completely liable for any debts or legal compensation for which the business becomes liable. Advantages : 1. Almost complete control over the business. He can take decisions without any interference. 2. Low administrative cost 3. No legal requirements Dis-Advantages : 1. All personal assets are at risk if the business fails. 2. He is the only person responsible for all the decisions of the business. Partnership Similar to Sole Trader but there is more than one owner. Owners of a partnership receive all the profits and have unlimited liability for the losses and debts of the business. The joint owners, or partners, are jointly and severally liable for the losses the business makes. Advantages : 1. More capital than a sole trader. 2. More expertise and skill of different partners can be brought into the business. 3. No legal requirements. 4. Work can be shared. Dis-Advantages : 1. Partners’ personal assets are at risk if business fails. 2. Potential for conflict between partners in decision making Limited Liability Company ❖ Limited liability companies are established as separate legal entities. They come into existence by a process of law and can be put to an end by a process of law. ❖ The owners of the company, called the shareholders, invest capital in the business in return for a shareholding that entitles them to a share of the residual assets of the business (i.e. what is left when the company is wound up or liquidated). ❖ The shareholders are not personally liable for the debts of the company. ❖ Companies are accountable to its shareholders, and must hold an Annual General Meeting every year. ❖ Companies are obliged to meet legal filing requirements. ❖ Management is different from ownership. Limitations of a Limited Liability Company When being formed companies have to register and file formal constitution documents with a Registrar. Registration fees and legal costs have to be paid. F.A. 3 C.A. Prabodh Nayak [C.A., M.B.A.,C.F.A., P.G.D.T.F.M., C.M.A. (US), C.P.A.] MAHE BANGALORE In addition it is normally a requirement for a company to produce annual financial statements that must be submitted to the Registrar. It is also usually a requirement for those financial statements to be audited (in some countries this is only a requirement for large and medium sized companies). The costs associated with this can be high. Partnerships and sole traders are not subject to this requirement unless their professional bodies require this. A registered company's accounts and certain other documents are open to public inspection. The accounts of sole traders and partnerships are not open to public inspection. Limited companies are subject to strict rules in connection with the introduction and withdrawal of capital and profits. Members of a company may not take part in its management unless they are also directors, whereas all partners are entitled to share in management, unless the partnership agreement provides otherwise.  F.A. 4 C.A. Prabodh Nayak [C.A., M.B.A.,C.F.A., P.G.D.T.F.M., C.M.A. (US), C.P.A.]